📘 Basic Accounting Reviewer: Trial Balance to Financial
Analysis
1. Trial Balance
Definition: A trial balance is a list of all ledger accounts and their balances at a certain date. It
ensures that total debits = total credits.
🧾 Example:
Account Debit Credit
Cash 5,000
Rent Expense 5,000
Owner's Capital 10,000
Totals 10,000 10,000
If total debits = total credits, the ledger is arithmetically correct. But it doesn’t guarantee there's no
error (e.g., posting to wrong account).
Understanding Debit and Credit
Account Type Normal Balance Increase With
Assets Debit Debit
Liabilities Credit Credit
Equity Credit Credit
Revenue Credit Credit
Expenses Debit Debit
Assets & Expenses = Debit
Liabilities, Equity & Revenue = Credit
What are Debits and Credits?
In accounting, every transaction affects at least two accounts and must maintain the balance
of the accounting equation:
Assets = Liabilities + Equity
To record this, we use:
Debit (Dr) – left side of an account
Credit (Cr) – right side of an account
Debits and Credits are tools to record movement in accounts, not "good" or "bad."
Assets (DEBIT)
Things the business owns
Examples: Cash, Equipment, Accounts Receivable, Supplies
Expenses (DEBIT)
Costs to operate the business
Examples: Rent, Salaries, Utilities, Supplies Used
Liabilities (DEBIT)
What the business owes
Examples: Accounts Payable, Loans Payable
Equity / Capital (CREDIT)
Owner’s claim in the business
Includes Owner’s Capital and Owner’s Drawings
EXAMPLES
1. Paid electricity bill, ₱1,200
Utilities Expense.........₱1,200 (Debit)
Cash............................₱1,200 (Credit)
2. Owner withdrew ₱3,000 for personal use
Owner's Drawing...........₱3,000 (Debit)
Cash............................₱3,000 (Credit)
3. Performed services on account, ₱7,000
Accounts Receivable.......₱7,000 (Debit)
Service Revenue.............₱7,000 (Credit)
Tips to Remember:
Debit = Add to Assets and Expenses
Credit = Add to Liabilities, Equity, and Revenue
Every debit entry has a matching credit (must always balance)
Statements and Their Analysis & Interpretation
1. Financial Statement Preparation
Definition:
Financial statements are structured reports that summarize a company’s financial performance and
position over a period of time.
Statement Purpose Key Components
Income Statement Shows profit or loss over a period Revenues - Expenses = Net Income
Statement of Beginning Capital + Investments + Net Income
Shows changes in capital
Owner’s Equity – Withdrawals = Ending Capital
Shows financial position at a point in
Balance Sheet Assets = Liabilities + Owner’s Equity
time
Cash Flow Shows cash movement in
Operating, Investing, Financing activities
Statement operations, investing, and financing
Main Financial Statements:
Prepare:
Income Statement
Statement of Owner’s Equity
Balance Sheet
2. Purpose and Limitations of Financial Ratios
Purpose of Financial Ratios:
To evaluate a company’s performance, financial health, and efficiency
To compare companies or periods
To assist in decision-making (investors, creditors, management)
3. Analysis of Financial Statements
This involves interpreting the numbers in the financial statements using tools like financial ratios.
a. Evaluation of Solvency
Solvency means the ability to pay debts when due.
Ratio Formula Meaning
Measures short-term ability to pay
Current Ratio Current Assets / Current Liabilities
obligations
(Cash + Receivables) / Current Measures liquidity without relying on
Quick Ratio
Liabilities inventory
Debt to Equity Total Liabilities / Total Equity Shows reliance on debt vs. owner’s capital
b. Evaluation of Long-Term Financial Position
Focuses on whether a company can survive and grow in the long run.
Ratio Formula Meaning
Debt Ratio Total Liabilities / Total Assets % of assets financed by debt
Times Interest Net Income + Interest Expense + Taxes / Ability to pay interest on long-
Earned Interest Expense term debt
c. Evaluation of Profitability
Measures the company’s ability to generate profit.
Ratio Formula Meaning
Net Profit Margin Net Income / Revenue % of revenue that turns into profit
Return on Assets (ROA) Net Income / Total Assets How well assets generate profit
Return on Equity (ROE) Net Income / Owner’s Equity Return to owners on their investment
1. Non-Current Assets
Definition:
Non-current assets (also called long-term assets) are assets that a company expects to use for more than
one year or one operating cycle. They are not intended for sale in the ordinary course of business.
Asset Type Description Examples
Property, Plant, and Physical assets used in business Land, buildings, machinery,
Equipment (PPE) operations vehicles, equipment
Assets without physical form but
Intangible Assets Patents, trademarks, goodwill
valuable
Investments held for more than a Stocks, bonds, real estate
Long-term Investments
year investments
Prepaid expenses or deferred Prepaid insurance, lease
Other Long-term Assets
charges lasting >1 year deposits
Key Points:
Recorded at historical cost less accumulated depreciation (except land).
Depreciation applies to PPE (except land) to allocate cost over useful life.
Intangible assets may be amortized instead of depreciated.
2. Non-Current Liabilities
Definition:
Non-current liabilities (also called long-term liabilities) are obligations a company expects to settle after
more than one year.
Liability Type Description Examples
Long-term Loans Loans payable after 1 year Bank loans, mortgage loans
Bonds Payable Debt securities issued to investors Corporate bonds
Lease Liabilities Obligations from long-term leases Capital lease obligations
Deferred Tax Liabilities Taxes owed but payable in future years Income tax deferred to future
